Brokers May be forced to raise Capital

Saturday, March 29, 2008 | | |

e Securities and Exchange Board of India (Sebi) says its move to margin institutional trades in the cash market on a T+1 basis from April 21 is to create a level playing field.

Subsequently, with effect from June 16, 2008, the collection of margins would move to an upfront basis.

“But upfront margin will also spawn front-running because it is a de facto disclosure of buy or sell orders. Foreign institutional investors will not be comfortable about this, and it can increase volatility,” said Gaurav Dua, head, research of broking house Sharekhan.

The move is altruistic in principle as it is aimed at creating safeguards to avoid a payment crisis such as the one seen in January.

And institutions anyway keep the money with their custodian. “Earlier the custodian would enjoy the float. Now they will have to make the early pay-in,” points out a fund manager who does not wish to be named.

Manish Sonthalia, equity strategist at Motilal Oswal, sees it as an attempt by Sebi to ensure a level playing field.

“Earlier, only retail investors needed to pay the margins. Now with the institutional short-selling being introduced, the regulator wants a level-playing field. There could be some procedural difficulties, but the principle is good for the market in the long run,” Sonthalia said.